Telecom Deals Ratchet Up Price Of Wireless Spectrum

From smartphones to tablets, Wi-Fi to 3G/4G: I cover telecom & mobile.

Verizon Wireless’ acquisition of $3.6 billion of wireless spectrum from Comcast, Time Warner Cable and Bright House Networks means spectrum just got scarcer and more expensive for everyone else.

A look at the price of spectrum back in 2006

The deal, announced earlier today, is undoubtedly good for Verizon. The telco hasn’t been as vocal as AT&T and Sprint Nextel about its need for additional spectrum, but consumer demand for bandwidth is pressuring every major wireless carrier, including Verizon. In a statement, Verizon called the sale “an important step toward ensuring that the needs and desires of consumers for additional mobile services will not be thwarted by the current spectrum shortage.”

The deal makes life harder for every other carrier looking for spectrum, however. SpectrumCo -- the joint venture between Comcast, Time Warner Cable and Bright House -- was one of the last remaining large holders of U.S. spectrum. Since SpectrumCo is giving its entire cache of spectrum licenses (122 in total) to Verizon in an exclusive capacity, the transaction eliminates a seller from the marketplace.

That shift will benefit two companies: wireless broadband provider Clearwire and satellite TV provider Dish Network. As Credit Suisse analyst Jonathan Chaplin puts it, Clearwire and Dish control the only major blocks of fallow spectrum left in the U.S. That is particularly true if AT&T’s proposed acquisition of T-Mobile USA falls through.

If the merger is approved, AT&T will likely have to divest spectrum to smaller carriers to ensure the U.S. wireless industry remains competitive. Recent events, including a highly critical Federal Communications Commission report, have made the deal less likely, however. If it fails, carriers hoping to get spectrum from AT&T, such as Leap Wireless, will need to look to Clearwire and Dish for capacity, writes Chaplin in a Dec. 2 report.

Another way the Verizon/SpectrumCo transaction will make spectrum more expensive is by setting a new benchmark price. The $3.6 billion deal values the spectrum purchased at $0.69 per MHz-POP (a measure of the number of people covered by each megahertz of spectrum.) As Chaplin notes, that price is 29% higher than the price the SpectrumCo spectrum originally sold for in a 2006 FCC auction.

Clearwire’s spectrum, in comparison, is trading at $0.17-$0.22 per MHz-POP, depending on certain funding assumptions. Clearwire’s spectrum is located in a different band than SpectrumCo’s, which, for technical reasons, is considered less desirable. Nevertheless, Chaplin writes, Clearwire’s spectrum isn’t worth that much less than SpectrumCo's – so the value should increase. (Clearwire’s spectrum would have been much cheaper if the company had been forced to liquidate its holdings but a last-minute partnership with Sprint, announced yesterday, saved Clearwire from that fate.)

The strategic value of Dish’s spectrum also has risen dramatically in the past week, according to BTIG analyst Walt Piecyk. Dish recently acquired that spectrum from a bankrupt satellite company, TerreStar Networks, for about $0.23/MHz-POP. (The spectrum, which is located in the so-called S-band is not identical to SpectrumCo’s spectrum, which is in the AWS or Advanced Wireless Services band, but has similar traits, says Nomura Securities analyst Mike McCormack.)

If the market revalues Dish’s spectrum based on the $0.69 price per MHz-POP paid in the Verizon/SpectrumCo deal, the stake would be valued at $8.6 billion, Chaplin estimates.

Timing will influence cost. If spectrum-hungry telcos act quickly, they can probably buy capacity from Clearwire, which is scheduled to complete an equity offering in coming weeks or months. Should they wait, the price of spectrum could continue to rise, posits Piecyk. He believes a number of companies will be affected by higher prices, including AT&T and T-Mobile (should their merger be blocked), DirecTV and MetroPCS.

Telcos that delay purchases may be pushed into negotiating with Dish instead. That will make Dish’s Chairman Charlie Ergen the wireless industry’s new “power broker,” writes Piecyk.

For another look at how the Verizon/SpectrumCo transaction affects the wireless industry, see my colleague Eric Savitz's post, "How The Verizon Spectrum Deal Changes The World Forever."

Technology is going mobile and I'm here to cover the shift. En route to the Forbes gadget beat, I worked at Business Week, Time Asia and Random House. I also lived in South Korea and Hong Kong, where I quickly acquired a taste for fast broadband and sleek phones. Now I'm a ...